I would like to draw your attention to the Protection of Foreign Direct Investment
Interests: Facing Host States Regulations and Risk factors, and International
investments agreements etc.

Introduction:
Overview

Investment is a capital transaction in which the investor expects a
return.---

Today, an
international legal framework for FDI has emerged. It consists of many kinds of
national and international rules and principles, of diverse form and origin,
differing in strength and degree of specificity.

In the past decades,
there have been significant changes in national and international policies on
foreign direct investment (FDI). These changes have been both cause and effect
in the ongoing integration of the world economy and the changing role of FDI in
it. They have found expression in national laws and practices and in a variety
of international instruments, Bilateral, Regional and Multilateral[1].

FDI acquired
increasing importance as the twentieth century advanced, and it began gradually
to assume the forms prevalent today. In international legal terms, however, FDI
long remained a matter mainly of national concern, moving onto the
international plane, where rules and principles of customary international law
applied, only in exceptional cases, when arbitrary government measures affected
it in a negative manner.

One important problem for empirical studies
analyzing FDI is that most of the data of FDI flows reflect not only current
decisions about home-country firms establishing new affiliates in host
countries, but also a large volume of reinvested profits that are driven by
past investment decisions not be related to the current drivers of FDI. As a
result, data on current FDI flows from countries that have built up large
stocks of FDI overseas in the past may not reflect current decisions on entry
into new host countries. Thus, inferences about the relation between these FDI
flows and corruption may be misleading. Empirical evidence for the interaction
of home and host-country levels of corruption is mixed.

At the sametimeitis important to
protectthe HostState’sinterests.Thereisno
doubtthatforeigninvestmentsaresubjecttothelawandadministrativecontrolofhostStates.Theguaranteesaffordedtoforeigninvestorsmustnot
jeopardizetheStates’righttolegitimate
regulation.Insomeareasofinvestmentimportantinterestsofthelocalpopulationareat stake.Thetaskofinternationalinvestmentlawistofindanappropriatebalancebetweenthese potentiallyconflictinginterests.

In the 1980s, a
series of national and international developments radically reversed the policy
trends prevailing until then, with an immediate impact both on national
policies regarding inward FDI and on regional and world-wide efforts at
establishing international rules on the subject. At the end of the 1990s, host
countries sought to attract FDI by dismantling restrictions on its entry and
operation, and by offering strict guarantees, both national and international,
against measures that seriously hampered investors’ interests[2].

The evidence on Home-Host State corruption interactions is thus
mixed.--

The section on the effect of corruption on
foreign direct investment (FDI) by Multinational corporations (MNCs) is both
extensive and noteworthy for the lack of agreement on whether corruption
influences FDI. In part, this is because there is little uniformity across
studies in terms of: the reasons why FDI should be affected by corruption, the
countries and times employed in estimating the effects of corruption, the
econometric methods used to obtain these estimates, and the control variables
used to explain FDI.

One important problem for empirical studies
analyzing FDI is that most of the data of FDI flows reflect not only current
decisions about home-country firms establishing new affiliates in host
countries, but also a large volume of reinvested profits that are driven by
past investment decisions not be related to the current drivers of FDI. As a
result, data on current FDI flows from countries that have built up large
stocks of FDI overseas in the past may not reflect current decisions on entry
into new host countries. Thus, inferences about the relation between these FDI
flows and corruption may be misleading.

A second contribution is that we are able to
disentangle the effects of corruption on two types of investment decisions: the
FDI location decision, where the MNC makes a choice about whether or not to
invest in a country; and the FDI volume decision, where the MNC decides how
much to invest, possibly by choosing among possible modes of entry.

The earliest studies of the effect of
corruption on FDI focussed on host-country corruption levels because
host-country corruption was viewed as an additional cost of doing business in
that country for foreign investors[3].
While a number of studies did find a negative effect of host-country corruption
on FDI inflows, others failed to find a significant negative effect. Authors of
studies who failed to find a significant negative coefficient for the “corruption”
variable attributed this to the fact that, under certain circumstances, for
example in highly regulated economies, bribes could allow the MNC to circumvent
burdensome regulations and bureaucratic obstacles at relatively little expense
and thus function more efficiently. This, of course, is an application of the
more general view that corruption may “grease the wheels” of business.

Empirical evidence for the interaction of
home and host-country levels of corruption is mixed. Another strand of the
literature seeks to estimate the effects of both home and host-country
corruption by using either panel or cross-section data on FDI and home and host
country corruption and economic characteristics.

The evidence on home-host country corruption
interactions is thus mixed. The role of the two types of corruption appears to
vary with the level of development of the host countries. The role of
corruption distance suggests a relationship between home and host-country
corruption, but the fact that the same value of the explanatory variable can be
generated by a corrupt host country and an non-corrupt home country or vice
versa, and this variable will then have exactly the same effect on FDI
seems counterintuitive. Even taking into account that the studies cited, as
well as others not cited due to space limitations, use different measures of
FDI (some using flows, others stocks of FDI) and different control variables for
the economic drivers of FDI, it seems clear that the relationship between home
and host-country corruption requires further study.

Corrupt host countries are less likely to
receive FDI inflows than are less corrupt ones. Home country corruption
influences outward FDI in a non-linear way. The most corrupt and the least
corrupt home countries are less likely to undertake FDI than are countries at
intermediate levels of corruption. I guess that this is due to the fact that
countries at intermediate levels of corruption provide a domestic environment
that makes home-country MNCs invest in both market-oriented firm-specific
sources of competitive advantage as well as in the acquisition of skills that
enable them to operate successfully in corrupt environments.

InterpretationofInvestmentTreaties

Treaty
interpretation, by contrast, has remained focused
upon the parties to a treaty, with even textualist approaches to treaty interpretation being justified as the best means of ascertaining the intent of
the contracting States.----

ØBilateral
InvestmentTreaties

The most important
source in contemporary investment law is bilateral investmenttreaties
(‘BITs’).BITs are a principal element of the current framework for FDI. More than
1,941 bilateral treaties have been concluded since the early 1960s, most of
them in the decade of the 1990s.

As elements of the
international legal framework for FDI, BITs have been useful since they have
developed a large number of variations on the main provisions of international
investment agreements (IIAs) – especially those referring to the ways in which
national investment procedures may be taken into account. Although the treaties
remain quite standardised, they are able to reflect in their provisions the
differing positions and approaches of the many countries which have concluded
such agreements. The corpus of BITs may thus be perceived as a valuable pool
for IIAs[4].

BITs were initially
addressed exclusively to relations between home and host, developed and
developing, countries. Yet, they have shown over the years a remarkable
capability for diversification in participation, moving to other patterns, such
as agreements between developing countries, with countries with economies in
transition or even with the few remaining communist countries. Thus, while
lacking the institutional structures and emphasis on review and development of
multilateral and regional instruments, BITs appear capable of adapting to
special circumstances. The increase in the number of BITs between developing
countries suggests that they may also be useful in dealing with some of the
problems in such relationships.

Even when the principal focus of BITs has been from the very start on
investment protection, they also cover a number of other areas to promote
investment:

- Broad definition of investment.

- National treatment.

- Most favoured nation treatment.

- Disciplines concerning expropriation and
compensation.

- Guarantee the right to transfers.

- Subrogation provisions.

- Mechanisms for the settlement of disputes State to State and Investor –
State.

Regional and Plurilateral Agreements are those in which only a limited
number of countries participate. Such instruments are increasingly important in
FDI matters.

Regional economic
integration agreements, for instance, involve a higher than usual degree of
unity and co-operation among their members, sometimes marked by the presence of
supranational institutions. NAFTA, APEC and the OECD are significant examples
of regional agreements.

Recently,
there has been a surge in regional investment, trade agreements involving a
relatively small number of countries. Contrary to what the name suggests, these
agreements may be concluded between countries in different geographical
regions. Examples of regional trade agreements include the North American Free
Trade Agreement (NAFTA), which has substantially reduced trade barriers for
agricultural commodities, manufactured goods, and services in North America.

Multilateral
vs Bilateral Agreements

Multilateral
agreements differ from bilateral agreements in that bilateral agreements occur
between two parties only. In relationship to international affairs, bilateral
agreements often take place between economic trading partners that depend on
each other for much or all of the exchange of certain goods and/or services.
Bilateral agreements and multilateral agreements can sometimes come into
conflict with one another, especially when the terms of a multilateral
agreement modify or nullify the terms of a longstanding bilateral agreement.

Advantages

Many liberal
economists argue that free trade among nations leads to win-win outcomes for
all. Economists states that welfare is maximized when each country specializes
in producing goods that best use that nation's land, labor and capital, then
trades its surplus for goods produced by other countries.

Disadvantages

International investment
takes place in a world of nation-states, without a global authority that can
dictate and enforce the rules. Also, agreements never make everyone happy.
Agreements that increase access to each member country's markets are supported
by sectors that export their products but are opposed by sectors that face
competition from imports.

Investment in the Multilateral Context

Foreign investment is one of the driving forces of globalization; carrying
ideas, jobs and export markets as well as capital from industrial to
industrializing countries. Most economic development strategies are now based
on attracting foreign firms, while both large domestic firms and stable
governments can rely on access to international financial markets to fund their
activities. While this process has been generally positive in the sense of
stimulating economic growth in developing countries, if not necessarily in
reducing poverty, the rapid changes involved clearly create both losers and
winners, and it is the role of international regulations and national
authorities to ensure that the economic benefits are maximized while the social
costs are minimized - particularly among the poor countries

ØMultilateralTreaties

With the
increased influence globalization, the actions of one nation bear on other
nations more than ever. Multilateral agreements have become an increasingly
important means for nations to resolve important issues in a way that
establishes common ground and resolves actual and potential points of
difference. Multilateral agreements frequently require complex negotiations
necessary to resolve the differences between the various parties and bring them
into agreement.

Multilateral
Agreements Defined

A multilateral
agreement is defined as a binding agreement between three or more parties
concerning the terms of a specific circumstance. Multilateral agreements can
occur between three individuals or agencies; however, the most common use of
the term refers to multilateral agreements between several countries.
Multilateral agreements are often the result of a recognition of common ground
between the various parties involved concerning the issue at hand.

In 1995, the 29 OECD Member countries plus
the European Commission[6]
started the negotiations of a Multilateral Agreement on Investment in order to
make up for the necessity of international co-operation to treat
comprehensively the FDI matter. The MAI sought to facilitate capital flows
among countries, eliminate investment barriers, improve the level of treatment
and, consequently, properly protect investors and their investments.

The basic provisions contained in the MAI
were:

- Scope.

- Treatment and protection of investment.

- Exceptions and safeguards.

- Financial services.

- Taxation.

- Transfers.

- Performance requirements.

- Expropriation and Compensation.

- Reservations.

- Relationship to other international
agreements.

- Dispute settlement.

Because of the number and complexity of the
topics covered, after long negotiations and internal consultations the MAI was
suspended. Notwithstanding the good will of the governments, the difficulty to
link the differing interests in a single text plus the complex negotiation
system, stopped negotiations in April 1998. The objective was that each country
make internal consultations and re-think its position carefully. Nevertheless,
in December 1998 the MAI was definitely suspended.

After the Uruguay
Round, international investment became a relevant issue in the core of the
multilateral trade system. Even when, at a glance, only exists the Trade
Related Investment Measures Agreement (TRIMs) with a reduced scope limited to
certain performance requirements, other agreements, especially the General
Agreement on Trade in Services (GATS), and less relevant, the Trade Related
Intellectual Property Rights (TRIPs) and the Agreement on Subsidies and Countervailing
Measures (ASCM), incorporate disciplines related to investment. Further, any
conflict arising on investment will be settled by the rules established in the
Understanding on Dispute Settlement[7].

Trade Related
Investment Measures (TRIMs) Agreement recognizes that certain measures on
investment can cause trade distortions. It limits its scope to investment
measures related to trade in goods (not in services) and forbids Member States
to apply a TRIM not compatible with the obligations established in the 1994
GATT Articles III (National Treatment) and XI (General Elimination of
Quantitative Restrictions).

There is an
illustrative list of TRIMs attached to the Agreement which describes those
measures that are inconsistent with the obligations mentioned above since they
are mandatory or enforceable under domestic law or under administrative
rulings, or because their compliance is necessary to obtain an advantage. It
includes measures that:

- Require the purchase or use by an enterprise of products of domestic
origin or from any domestic source.

- Require that an enterprise's purchases or use of imported products be
limited to an amount related to the volume or value of local products that it
exports.

- Restrict the importation by an enterprise of products used in or related
to its local production or the exportation or sale for export by an enterprise
of products.

It is important to
say that the Parties committed to review the Agreement before the following
five years after its entry into force. The review would include a possible
enlargement of the illustrative list and the addition of complementary
provisions related to policy competition for investment.

The TRIMs Agreement
has certain limitations:

- It only focuses on goods but ignores the services sector.

- The illustrative list only considers a limited number of TRIMs, if
compared to the comprehensive list contained in NAFTA Article 1106 (Performance
Requirements).

- It basically codifies current GATT jurisprudence, allowing the Parties a
temporal escape from their obligations.

ØGeneral
Agreement on Trade in Services (GATS).

The GATS is
considered the agreement of the multilateral trade system comprising the
largest number of provisions – protection and liberalization - related to
investment. It rests on three pillars:

b) Specific commitments of national treatment and market access applicable
only to those sectors and subsectors included in the lists of commitments of
each country.

c) Some Annexes that explain the manner in which GATS rules are applied to
specific sectors (e.g. air and maritime transport, financial services,
telecommunications).

Even when the GATS
does not mention the term “investment”, this is included in the third mode of
supply (commercial presence). In this sense, commercial presence is defined as
any type of business or professional establishment, including through: i) the
constitution, acquisition or maintenance of a juridical person; or, ii) the
creation or maintenance of a branch or representative office within the
territory of a Member for the purpose of supplying a service.

Dynamics of
Liberalisation.

- The GATS Agreement does not grant the right of establishment. On the
contrary, it is subject to the terms set out in the lists of commitments.

- The main provisions referred to liberalization are: Most Favoured Nation
Treatment (art. II), Market Access (art. XVI) and National Treatment (art.
XVII). Of those disciplines, the MFNT is the only principle applicable to all
Members and services sectors, although qualified by the exceptions to that
obligation.

- Market Access is defined according to six types of limitations that the
Members should prevent to impose.

- The National Treatment provision obliges each Member to accord to
services and services suppliers of any other Member, treatment no less
favourable than that it accords to its own like services and service suppliers.
Article XVII points out that the national treatment could not always be
identical, provided it does not modify the conditions of competition of the
foreign suppliers.

- The GATS allows Members to maintain non-conforming measures provided
they list them in the list of commitments under a negative approach. Likewise,
Members may adopt new discriminatory measures in those sectors not established
in the list of commitments (on a MFN basis) or in sectors subject to MFNT
exceptions.

Other applicable
provisions

- Article V establishes a general exception with respect to Economic
Integration Agreements.

- There are general exceptions similar to those contained in the GATT.

- Provisions of future negotiations on safeguards and subsidies are
established.

- GATS applies a test of “substantial business operations” to determine
who qualifies to obtain the benefits of the Agreement. There are property and
control elements included.

- There are no provisions on performance requirements or monitoring.

Investment Protection.

The GATS has only a few provisions related to the protection of
investment:

- Payments and transfers.- It is not a general obligation; Members should
not limit the current payments and transfers in committed sectors.

- Balance of payments clause.

- No provisions on expropriation and compensation.

- The Understanding on Disputes Settlement is applied.

ØFree Trade Agreements.

Free trade
agreements worldwide are about integrating economies. Their primary purpose is
to reduce the relevance of national borders relative to international trade.
Competition among the world's producers, without interference from governments,
is the ultimate purpose of most, if not all, free trade agreements.

Features

Free trade
agreements typically concern the gradual reduction of tariffs over time. A
tariff is a tax on imports, making the imported good more expensive and hence,
making domestic production more attractive to consumers. Many such agreements
seek to eliminate tariffs completely. This permits firms to invest in each
other's economies with little adjustment.

Function

Comparative
advantage is the main function of a free trade agreement. Put simply,
comparative advantage is about the maximization of efficiency. Those economies
that can produce goods more efficiently should be able to freely import them
into other countries. The ultimate beneficiaries are the consumers of the
world, that can buy these goods at a lower price. Free trade agreements,
therefore, are about putting consumers first, giving them a choice among a wide
range of products, rather than subsidizing domestic producers.

Significance

Free trade is
one of the marks of the modern, global economy. Producers and consumers, rather
than states and governments, are put first. The ultimate purpose of all free
trade agreements is to create a global marketplace where borders no longer
matter, where goods, labor and capital can move freely with minimal hindrance.

Benefits

Free trade
agreements build goodwill among countries through economic cooperation. These
agreements fight corruption in that to compete with major firms, local firms
must retool their processes and become more transparent, streamlined and
efficient. Since efficiency is rewarded in the marketplace, fewer resource are
used in the production of goods. Consumers have greater choice among products;
and since competition among firms is greater, prices tend to be lower.

Problems

Free trade
agreements permit capital to move freely, thereby evading many local
regulations on the environment or labor. Labor also moves freely, which acts as
an incentive for firms to invest where labor is cheaper, negatively affecting
the wages of domestic workers. Free trade agreements remove any government
control over the economic life of the nation and place this control in the
hands of corporations. Put differently, free trade removes “politics” from
economic transactions. But this can mean that the public good is no longer
important in economic relations, only profits and efficiency.

To illustrate the
value of free trade agreements (FTAs), the case of Mexico is a good example.
Mexico has become a very attractive country to foreign investment thanks to its
broad net of FTAs. Today, Mexico has a preferential access to 850 million
consumers in 32 countries[8].

All the FTAs signed by Mexico include investment chapters. These chapters
contain the following principles and provisions:

- Broad definition of investment, based on
the concept of enterprise.

- National treatment.

- Most-favoured nation treatment.

- Minimum standard of treatment.

- Senior management and board of directors.

- Reservations and exceptions.

- Performance requirements.

- Expropriation and compensation.

- Transfers.

- Investor – State Dispute Settlement
Mechanism.

When talking about
FTAs we refer to new investments and more exports and, consequently, more and
better paid jobs and a stronger domestic market. We understand that, certainly,
the FTAs will not solve immediately the ancient problems of inequity,
unemployment and marginalization, but they will – and they have to – contribute
to solve them efficiently.

ØTreatment of Investors and Investments

International protectionisrestrictedtoforeigninvestments. The foreignness
of the investmentisdetermined
bythe investor’snationalityand not
bytheoriginof
the investedcapital. Theinvestor’s
nationalitydeterminesfromwhichtreatiesitmaybenefit.Exceptionally,the statusofaforeigninvestormaybeextendedtopermanentresidents.[9]

National Treatment
(NT) and Most Favoured Nation Treatment (MFN) The MAI provides that contracting parties shall accord to investments
protected under the agreement, treatment no less favourable than that
accorded to its own nationals’ investments (NT) or to investments from any
other country, whether or not a party to the MAI (MFN); and in any case, shall
accord to them the more favourable of NT and MFN. Both NT and MFN are relative
standards of treatment, i.e. they refer to other already existing bodies of
rules in the recipient country. This implies that the investment treatment
accorded to a foreign investor under the MAI has to be, at least as
favourable (but not necessarily more), than that already provided for in the
domestic legislation applicable to both local investors and other foreign
investors. Therefore, NT and MFN determine the rules applicable to foreign
investment by referring to the host country’s domestic law. This, in turn, has
important implications for developing countries.

As indicated in this section, one
of the most important risks that a foreign investor faces is that of
expropriation. As noted there, “expropriation risk” is one species of
“political risk”, and it is the threat that the government of a Host Sate where
an FDI is situated will take the property of the investor. Such a taking can be
either dramatic and sudden or it can be subtle and slow-so called “creeping
expropriation”.

·Lawfulness – the
question of whether the circumstances in which an expropriation occurs were
such as to give the host country the right to undertake the expropriation (a
key concept here is that of “public purpose”);

·Compensation – the
question of whether compensation is owed, and (it so) how much compensation is
owed, to the foreign investor in respect of the expropriation (and this involves the subsidiary questions
of when and in what form compensation is to be paid);

·Defenses – the
question of what grounds are available under international law to defend a host
country against a legal action brought by a foreign investor whose assets have
been expropriated (key concepts here are those of “act of state” and sovereignty).

These three issues are discussed
in the following paragraphs[10]. As you study them,
consider how you might advise a client whose FDI assets have been recently
expropriated by the host government in a country with the foreign investor's
home country does not have a BIT - and assume for these purpose that your
client did not obtain any insurance of the shall examine in this section.

ØExpropriation and Compensation

The topic of expropriation
substantively originates from the discussions on investment protection. Within
Bilateral investment treaties, the protection of investors from expropriation,
and corresponding access to compensation, are two of the principal objectives.
Expropriation or Nationalization can be briefly explained as the taking of private
property by the State using legal or administrative acts to transfer the
property to the State or State-controlled legal entities. Once the investment
has passed the pre-establishment phase in might be sublect to expropriation or
nationalization, which terms basically mean the same thing, by host country
State authorities.

Due to national sovereignty,
changing political opinions and prospective amendments to national law in the
host country of investment, investors are faced with latent uncertainly and
danger that they may lose their investments in either substance or value.

The former procedure (substance)
is called direct expropriation more however do exist. Although, during recent
decades, outright expropriations of foreign owned property have not been
significant, it appears appropriate, in light of what are nevertheless major
taking of investment, to reconsider legal instruments to improve protection of
foreign investments with regard to expropriation and comparable regulatory
takings.

Bilateral treaties, in almost
every case, include provisions dealing with expropriation and compensation. In
addition, some regional investment treaties refer to this subject, whereby
Article 1110 NAFTA Treaty and Article 13 Energy Chapter are the most prominent
examples using similar standards. However, there is no multilateral investment agreement
dealing with such standards –creating one, ideally combined with a dispute
settlement mechanism, will certainly enhance an investment’s security and
predictability as well as an investor’s willingness to conduct foreign
investments.

The problem of defining the
process and scope of expropriation, nationalization or similar takings appears
to be a major debate when addressing this issue of international investment
law.

A broad interpretation of the term
would cover as many of State authorities. However, it is criticized by others
because profit making would be valued higher than environmental measures
undertaken by host country governments as such measures are increasingly
considered to be regulatory takings.

Further, sufficient protection
against the infringement of intellectual and industrial property rights often
in not guaranteed under BITs however Multilateral Investment Treaties (MAI) may
be able to do so. Another problem is the definition of the term compensation,
the calculation procedures for compensation payments, as well as the payment
distribution procedure.

Finally, it remains doubtful that
the terms will be defined and specified sufficiently in the agreement leaving
this task to panel or court rulings. Nevertheless, before being able to rely on
such rulings, an enforceable dispute settlement system must be established or
an existing one enhanced to apply on a multilateral level.

Due to this yet non-exhaustive
list of problematic issues arising while negotiating multilateral investment
rules in the area of expropriation and compensation it remains doubtful whether
an accord can be found in near future. Existing provisions in bilateral
investment agreements could serve as a helpful basis for further discussions,
nevertheless, they do not constitute customary international law and therefore
ongoing debates are pre-programmed.

ØLawfulness

First, was the taking of the
foreign investor’s property by the Host State government lawful? It’s generally
thought (and expressed in the literature on the topic) that in order for a
government’s expropriation to be lawful, it must be both 1).for a public
purpose and 2). non-discriminatory.

The first of these requirements –
that the taking be foor a “public purpose” –reflects a compromise between two
competing views. On the one hand, a sovereign nation is ofthen said to have
full and permanent sovereignty over its natural resources and its economic
activities. Numerous UN General Assembly resolutions have expressed that view,
and it is generally accepted in the international community, at least as a
theoretical matter (and subject in recent years to the obligation of a country
not to use its natural resources in way that brings environmental harm to
another country)[11].
That sovereignty over natural resources and economic activities, it is
asserted, gives the nation’s government the right to take privately owned
property, whether that property is owned by nationals of that country or by
foreign nationals.

ØDefenses

The third key issue relating to
expropriation arises when a foreign direct investor actually sues (or lodges
some other official complaint against) the Host State government that has
expropriated its property interests. What defenses under international law are
available to the Host State government that expropriated an investor’s
property? The answer involves the act of State doctrine[12],
Sovereign immunity[13],
and the Calvo doctrine[14].
These are important enough to warrant a brief summary[15].

Thestandarddoes not provide an absolute
protectionagainst physicalorlegal
infringement. In termsof the lawof State responsibility,the hostStateisnotplacedunderastrictliabilitytopreventsuchviolations.Rather,itisgenerallyacceptedthatthehostState
willhave to exercise due diligenceandwill haveto take such measures protectingtheforeign investment
as
are reasonable under thecircumstances.

Clearly, investment
protection is an issue of key importance for developing countries, particularly
the poorest ones where the social and political context tends to be more
unstable. The regime delineated by the MAI has the following central elements:

oEach contracting party shall accord to foreign investment fair and equitable
treatment and constant protection and security. In any case, such treatment
should be no less favourable than that required by international law. This
standard of treatment is ‘absolute’ (i.e. it is not contingent on host
country’s legislation), as opposed to NT and MFN (relative standards).

oExpropriation of foreign investment (and measures having similar effects)
shall, be limited to cases of public interest, be applied in a
non-discriminatory manner in accordance with due process of law, and be subject
to prompt, fully convertible and transferable compensation at fair market value.
Interest rate payments or exchange loss adjustments shall be borne, when
applicable, by the host country.

oIn case of war, civil disturbance or armed conflict of any sort,
compensation to foreign investors should be in accordance with the better of NT
and MFN (except that loss of property occurs from requisitioning or unnecessary
destruction by the host country’s armed forces, in which case full compensation
is due).

oAll payments to or from the foreign investor shall be freely transferred
into and out of the host country in a convertible currency. Transfers may only
be delayed to protect creditors or to comply with domestic securities or
criminal laws. Transfers of data and information in and out of host country
shall also be freely made.

oThe MAI would protect investments made before and after its entry into
force.

These ‘absolute’
standards and rules for the protection of investment are essential for the
improvement of the investment climate in the developing countries.

Conclusions

Today, international investment faces a
patchwork of regional and bilateral instruments that regulates FDI flows. On
one hand, the existence of such a quantity of instruments definitely makes
evidence of the levels of convergence that have been reached on investment, as
well as the interest of the countries to guarantee more stability in the
investment rules. On the other hand, it also introduces elements of confusion,
inefficiency and uncertainty since it enhances the fragmentation and
overlapping of different regimes applicable to FDI in a world in which investments
are global or regional.

From this, it can be inferred that a
multilateral negotiation on investment would be convenient. A multilateral
framework could be useful to reduce the conflict among the rules of different countries
and, at the same time, would reduce the inefficiencies and the wrong
distribution of resources that provoke the number and diversity of rules on
investment.

Investment is a capital transaction in which the investor expects a
return.

Cuervo-Cazurra,
Alvaro and Mehemet Genc (2008) Transforming Disadvantages into Advantages:
Developing-Country MNEs in the Least Developed Countries. Journal of
International Business Studies Vol. 39, (2008)

The Act of state doctrine is a construct of American
jurisprudence. Essentially, the doctrine asserts that a US court will not
adjudge an act of foreign state. The doctrine was laid down initially in the
1897 Underhill case, and it has been applied ever since, most notably in the
famous Sabbatino case. In Sabbatino, the US Supreme Court reiterated the
holding of Underhill regarding the Act of State doctrine:

The
classic American statement of the act of state doctrine, which appears to have
taken root in England as early as 1674, and began to emerge in the
jurisprudence of this country in the late eighteenth and early nineteenth
centuries, is found in Underhill v. Hernandez, where Chief Justice Fuller said
for a unanimous Court:

Every
sovereign state is bound to respect the independence of every other sovereign
state, and the courts of one country will not sit in judgment on the acts of
the government of another, done within its own territory. Redress of grievances
by reason of such acts must be obtained through the means open to be availed of
by sovereign powers as between themselves.

Although
“originally based on principles of country and sovereign immunity, the act of
State doctrine was held by the Sabbatino Court to preclude the Court from
“interfering in matters that were primarily the responsibility of the executive
or legislative branches of the government. In this case, the Act of State
doctrine (based on separation of powers theory) precluded the Court from
invalidating the Cuban government’s title to a quantity of sugar that was,
prior to being nationalized, the property of respondent Sabbatino.

Sovereign immunity is a second defense A Host State government
might make in a suit brought it by a foreign direct investor arising out of an
expropriation. Understanding this defense, however, pre-supposes an
understanding of sovereignty. What does “sovereignty”mean?

Fundamentally, “sovereignty” dictates that a nation has the
right to act as it wishes within its own boundaries. Of course, this right is
qualified by 1) the existence of treaties to which a nation has become a party
and 2) customary international law-as discussed above in this section.

All states
are sovereign within heir own territory, and … the maxim of “pari parim non
habet imperium” .. means that no state could be expected to submit to the laws
of another. This finds expression, for example, in the claims of certain
developing states that they have the absolute right to expropriate property of
foreign investors located within their territory, and are not bound by any law
external to their own with regard to compensation to be paid to the investor.

The calvo doctrine is derived from the work of Carlos Calvo, a
nineteenth century Argentinan legal scholar. A response to intervention by the
USA and EU powers in the affairs of latin American countries at the time, the
Calvo doctrine’s two basic principle are: 1) the “National standard,” which
provides that foreigners should not be granted more rights and privileges than
thoe accorded nationals; and 2) the “diplomatic intervention” provision that
foreign states may not enforce their citizen’s private claims by violating the
territorial sovereignty of host states either through diplomatic or forceful
intervention.